Is it possible to put dividends payable on balance sheet? Here is the answer!

Is it possible to put dividends payable on balance sheet? Here is the answer!

By Nguyen Oanh
Published: 17/01/2022

You are questioning if it is possible to put dividends payable on balance sheet? The answer is yes! When a company decides to pay dividends to its shareholders or partners, this must appear in its accounts and be recorded on the balance sheet.

Dividends paid to natural persons are net, the company must account for gross dividends and with holdings to be paid to the tax authorities. Dividends received are financial products that must be recorded on the journal entry corresponding to their nature.

So what are dividends payable on balance sheet and cash dividends? How do dividends payable affect the financial statements? What is the difference between the cash dividend and the stock dividend? Let’s discover all in this article with some examples!

What are dividends payable on balance sheet?

Dividends payable are the liability on the balance sheet. The benefit of an investment in shares for the shareholder can come from two forms: The capital gain, which represents the increase in the valuation of the company, or the dividend.

The dividend represents the income paid by the company to its shareholders once or more times a year (some companies pay an interim dividend). The dividends declared have not yet been paid in cash.

The amount of the payment declaration is proposed by the Board of Directors at an Ordinary General Meeting and voted on by the shareholders. It is therefore the shareholders of the company who make the decision, and it is logical that they decide at some point to be remunerated, by paying themselves a part of the annual profits of the company. A large dividend payable is considered a stock split.

How do dividends payable affect the financial statements?

Since dividends are a form of cash flow to the investors, they are an important reflection of the value of a business. It's also important to note that common stocks with dividends are less likely to reach unsustainable values. Investors have long known that the dividends cap market declines.

In a struggling market, dividends ensure investment stability

While everyone is panicked by the decline in stocks during a recession, dividend investors instead see it as an incredible buying opportunity. Furthermore, dividends help identify well-run companies. Companies that grow their dividend on a regular basis tend to be the ones with the best financial position and are able to sustain earnings growth.

Unlike profits, dividends cannot be manipulated or falsified.

From an accounting standpoint, it is relatively easy to falsify and manipulate income to impressively embellish it. However, there is no faking possible on the income that is paid to your brokerage account.

Dividends are a means of immediate and permanent control

Over time, investors see their dividend income grow steadily. You don't have to wait five to ten years to determine if the strategy is working. Each dividend and each of its increases provide the investor with the assurance that they are on the right track.

Reinvestment of dividends has provided a significant portion of historical stock returns

Performance in any given year is driven by capital appreciation, but in the long-run returns are largely the result of reinvesting dividends. Investors should focus on total profitability, including both price changes and dividend distributions, and not just the price of their funds.

What is a cash dividend?

A cash dividend is a cash payment that is made to shareholders by the issuing company. Dividends are normally paid according to the terms described in the company's articles of the corporations unless the board of directors works with shareholders to defer payments for a period of time.

Generally, cash dividends are paid out of the profits made by the company during the quoted period, although it is possible that a cash dividend will be paid even when there is no net profit for the company. Cash dividends have an impact on the shareholder’s equity on the balance sheet.

The difference between the cash dividend and the stock dividend

In general, during their general meeting, some companies offer the possibility for shareholders to obtain the proposed dividend in cash or in shares. A number of listed companies now offer their shareholders to also receive the dividend in the form of shares and not just cash.

A regular income for the shareholders

To pay dividends owed to its shareholders, or interest on bond loans it has obtained, a company sends out a cash dividend. In general, in the interests of efficiency and to reduce the risk of error, the company instructs its bank to write and send these cash, for a fee. Like other checks, this means of payment is increasingly replaced by an electronic transfer, confirmed by a letter with the reason and details, or even entirely online. They provide shareholders with regular income on their investment, and they can use it for their actual investment.

Otherwise, when a company distributes more shares, there are more shares in circulation. And that devalues ​​these actions. Your shares will be worthless and lose their value.

Less of risk for more security

The payment of a dividend in shares corresponds, in fact, to a capital increase. The number of shares to be remunerated is, in fact, increased, which will further reduce earnings per share, and therefore the unit amount of future dividends. Another risk is when you take more actions, which means you also take more risk if the business doesn't go as planned.

How to make a choice?

In fact, companies prefer having a stock dividend solution without a cash option. Companies that offer the stock dividends can provide to their partners the possibility of keeping their regular incomes or converting them to cash whenever they want; while with a cash option, they can’t have these choices.

Example of dividends payable

Not everyone can collect dividends. In fact, they are reserved for people who have taken part in the capital of the company, either at the time of its constitution or during the life of the company.

To help you understand more about dividends payable on balance sheet, especially cash dividends, we make an example for you.

Let’s take an example, a company decided to distribute a dividend of 0.45 dollars per share. This company wants to grant each shareholder the possibility of opting for payment of the dividend either in cash or in new shares. The issue price of the new shares delivered as payment of the dividend is set at 90% of the average opening price of the share, less the amount of the dividend. It stands at 9.49 dollars.

Let’s say that you have 1,000 outstanding shares. You could either obtain a dividend of 450 dollars, or 47 shares (450 / 9.49 = 47.42) and a cash payment of 3.97 dollars (450 47 * 9.49). Generally, with the discount, the option of the dividend in shares is interesting since the shareholder receives new shares. He is also increasing his share in the company. The choice then depends on the conviction you have in the future of this company.

Key takeaways

In conclusion, the total amount of the dividend paid is then taken from the company's cash and retained earnings. Even if shareholders are paid on the dividend, they can also decide to pay little or no dividend at all. They hope that this money that will not be distributed will be invested in growth projects, which will ultimately increase the value of the company.

A company may provide in its articles of association that the shareholder will have the option of receiving the dividend in cash or in shares. The number of shares given to the shareholder also depends on the amount of the dividend and the number of shares he holds.

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